EU warns Italy over its soaring debt

In a letter seen by AFP, the European Commission said that the Italian government was in breach of EU budget rules for running excessive debt and asked for "clarifications" within two days.

"Based on notified data for 2018, Italy is confirmed not to have made sufficient progress towards compliance with debt criterion in 2018," the EU letter said.

The request by the executive arm of the European Union infuriated Rome and rekindles a long process that could see Italy's government hit with unprecedented sanctions for running a huge debt and breaking spending promises to the EU.

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Italy's nationalist Deputy Prime Minister Matteo Salvini on Tuesday dismissed the warning, adding that he expected Brussels to sanction his country for its deteriorating deficit and huge debt by imposing a fine of €3 billion.

"Gentlemen of Brussels, the time is over for little letters, reminders that say you are bad ... and should remain unemployed for ten years because that is the European rule," Salvini said. "Let us recover our right to growth and the future," he said in Rome.

'Fiscal shock'

After his crushing victory in the European elections, where he won 34 percent of the vote, Salvini stressed the need for a "fiscal shock" to revive the country. This includes tax cuts that he said would cost €30 billion.

"All my energy will be used to change these old rules," said Salvini.

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Photo: Vincenzo Pinto/AFP

Italy's colossal public debt stands at 132.2 percent of GDP in 2018. This is well above the 60 percent threshold set by European rules and next week the commission is expected to recommend opening an "excessive deficit procedure" as punishment.

The opening of such a procedure, which needs to be validated by EU finance ministers, could result in financial sanctions of up to 0.2 percent of Italian GDP, which corresponds to the €3 billion mentioned by Salvini.

The populist-rightwing coalition in Italy, which brings together the League and the Five Star Movement, had already been in conflict with Brussels at the end of last year over Rome's big-spending 2019 budget, which the commission rejected in a historic first.

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Both sides finally softened their positions to reach a compromise, but in the commission's latest economic forecasts, published in early May, Italy was the worst economic performer in the eurozone, with growth well below other countries and debt at a record level.

The spread, the closely watched premium asked by investors for Italian versus German debt and a good indication of market concern, has widened sharply over the past three days given the tensions with Brussels. It went from 2.67 percentage points last week to 2.87 on Wednesday, after hitting a peak of 2.92. 

By AFP's Alex Pigman